Silicon Valley Bank, why was the run to bankruptcy in 1 day?

Starting next Monday, the U.S. technology center of Silicon Valley, there will be countless employees of start-up technology companies, cannot get a salary, or even, they cannot afford to pay the office rent……

The reason is –

The famous Silicon Valley Bank (Silicon Valley Bank, hereinafter referred to as “SVB”), was declared bankrupt.

This is no ordinary bank.

Founded in 1983 and headquartered in Santa Clara, California, SVB has its roots in the U.S. technology ecosystem and is marketed as a “financial partner to the innovation economy,” providing banking services to nearly half of all venture-backed technology and life sciences companies in the United States.

SVB focuses on serving the financing needs of PE/VC and startups, while also generating its own private banking, equity and investment banking businesses – with high growth, high profitability characteristics and long-term ROE levels higher than those of traditional commercial banks.

With approximately $209 billion in assets as of December 31, 2022, SVB ranks 16th in the U.S. banking industry, with $175.4 billion in depositor savings on its books, and its business model of supporting innovative technology companies in particular is being studied and emulated by many Chinese banking institutions.

Further, right here in Silicon Valley, 50% of all U.S. venture-backed startups have deposits with SVB, and in the case of SVB, 97% of deposit accounts, exceed the FDIC insurance limit ($250,000).

In that sense, if SVB goes bankrupt, then as many as 50% of venture-backed startups will be in crisis mode, unable to withdraw cash, and countless other individual accounts with deposits at SVB will also find themselves in danger of losing all of their deposits over $250,000 to zero overnight on Monday.

When SVB goes bankrupt, it’s only natural that these tech companies won’t be able to pay their salaries or pay their rent.

Just one day earlier, on March 9 US time, SVB announced a massive bond sale and refinancing plan to.

1) Sell $21 billion of bond investments to immediately reallocate to short-term bonds to improve asset sensitivity, but this sale; however, is expected to cause an after-tax loss of $1.8 billion to it.

2) Increase the size of term borrowings, from $15 billion to $30 billion by the end of 2022, to lock in financing costs as well as provide more stable liquidity support for the company.

3) equity refinancing of $2.25 billion to cover losses and provide liquidity support to the bank, including $1.75 billion in common stock and $500 million in preferred stock.

However, the market did not approve of SVB’s refinancing proposal and SVB’s share price plunged 60% on the same day, meaning that its plan to rely on equity financing became a bust.

More interestingly, just on March 7, SVB had just officially announced that.

“It is an honor to be on Forbes’ annual list of America’s Best Banks for the fifth consecutive year.”

On top of the list, SVB is ranked #20.

In a way, we can consider SVB as one of the best banks in the US until the bond sale and refinancing proposal on March 9, and its solid operations even helped the company to survive the global financial crisis in 2008, and the epidemic crisis in 2020……

Just before SVB stock plunged on March 9, no one, including SVB itself, could have imagined that it would be run down to the point of declaring bankruptcy just 2 days later.

So, what exactly did SVB go bankrupt for?

The answer is.

Balance sheet collapse + 1 day liquidity run.

The reason for SVB’s bankruptcy can be traced back 3 years.

With the arrival of the 2020 epidemic, the Federal Reserve lowering interest rates to 0 and promising unlimited QE money printing, a global funding boom for tech companies, and rapid growth in loans and VC funding for startups, SVB’s deposits, the most tech startup-friendly bank, skyrocketed – according to its quarterly earnings report, from June 2020- December 2021, the bank’s deposits skyrocketed from $76 billion to $190 billion.

The massive inflow of capital means the bank’s liability side is skyrocketing. As a profit-seeking institution, SVB of course needs to invest this money “safely” to buy the appropriate assets and earn interest spreads.

The problem was that the Fed did not start raising interest rates in 2020-2021, and almost all of the “safe assets” had very low yields. Treasury holdings grew from $4 billion to $16 billion, and MBS grew from over $20 billion to $100 billion. At the same time, SVB’s cash and cash equivalents on hand (including reserves, repos, and short term debt) have instead fallen from $14 billion to $13 billion.

What this means is that SVB’s total assets are around $200 billion and $100 billion in MBS assets, which account for more than half of its balance sheet, means that its liability side, which is subject to a huge impact on the value of MBS. On the other hand, its cash is too small compared to its deposit share to deal with a run in the short term.

During this period, SVB and almost all large U.S. financial institutions believed that the likelihood of interest rates rising and exceeding 2% in the future was very low, and that the Fed was paying only 0.1% for bank cash (reserves), while after SVB’s operations, the combined annualized yield on its Treasuries was “as high as 1.49%”, and the long-term MBS yields are “as high as 1.91%”.

2022 came and went, as inflation soared and the Fed began a frenzied path of interest rate hikes.

By March 8, 2023, the yield on the 10-year U.S. Treasury bond soared to 4% and the 15-year fixed-rate mortgage rate rose to over 6%, meaning that SVB’s holdings of Treasuries and MBS had, in essence, depreciated substantially. Some estimates put the total devaluation of its Treasuries at as much as $2.5 billion, while the total devaluation of its MBS could be as much as $15 billion.

Both the British pension or Silicon Valley Bank’s operations are under the strict supervision of the financial regulatory authorities, as long as their operations are compliant and legal, this loss is not too outrageous, when the central mom’s love (slowing down interest rate hikes or holding off on tapering) came, the original market panic, naturally, will slowly calm down, the entire financial system will not be fundamentally affected by this.

In short, the Silicon Valley Bank this matter, by the Federal Reserve such a heart of the world’s central mom in, not afraid of not afraid of it!



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